On Wednesday, January 10, 2024, for the first time in U.S. history, the Securities and Exchange Commission (SEC) approved the listing and trading of spot bitcoin exchange-traded funds (ETFs). Among those includes the Bitwise Bitcoin ETF (BITB)—the first spot bitcoin ETF issued by Bitwise Asset Management. Less than two months later, on Friday March 8, 2024, the price of Bitcoin, the largest cryptocurrency by market capitalization, reached an all-time high of more than $70,000. With the inflated price of Bitcoin and its newfound accessibility that BITB provides, there is a crucial question that every investor should have on their mind: is investing in BITB in my best interest? The purchase of these investments, according to Regulation Best Interest, should only be made by an investment recommendation if it is in your best interest after diligent consideration by your financial professional. A Crypto-Securities law firm in New York, like Malecki Law, can help you determine whether Regulation Best Interest was violated.
As demonstrated by its name, an ETF is a pooled investment security that has attributes similar to both a stock and a mutual fund. “Exchange-traded” refers to the security’s ability to be traded on the market like a stock, while “fund” refers to its ability to consist of a diverse allocation of assets like a mutual fund. The concept of Bitcoin ETFs is not new to the world of securities, for example, Bitcoin futures ETFs, or ETFs that invest in Bitcoin Futures contracts (time-limited agreements to buy or sell Bitcoin at some point in the future), have been around since 2021. However, Bitcoin futures ETFs have unappealing features like “roll premiums,” which are costs incurred when selling expiring contracts and buying new ones. Additionally, futures contracts do not accurately track the spot prices of Bitcoin, meaning the immediate or current price of Bitcoin, so returns may never be as high as spot market prices. You may need a Crypto-Securities attorney in New York, like the lawyers at Malecki Law, to analyze your crypto-based investments to determine your potential losses.
On the other hand, spot Bitcoin ETFs do in fact provide investors with the spot price of Bitcoin and do not rely on futures contracts. Spot Bitcoin ETFs hold Bitcoin as its underlying asset, meaning the ETF actually holds an equivalent amount of Bitcoin to back every share of the ETF that is sold. These shares, which are priced to reflect the spot price of Bitcoin, can be traded on traditional stock exchanges. Therefore, purchasing shares of a spot bitcoin ETF is a relatively easy way for investors to gain Bitcoin exposure to his or her investment portfolio.
On January 11, 2024, BITB began trading on the NYSE Arca under the ticker symbol “BITB.” BITB’s management fee is set at 0.20%—the lowest among current spot bitcoin ETFs—but it waived its entire fee for a six-months period on the first $1 billion in assets. Additionally, 10% of BITB’s profits will be donated to Bring, OpenSats, and the Human Rights Foundation’s Bitcoin Development Fund – three non-profit organizations that fund Bitcoin open-source development. The recipients were selected based on their specific mission and performance history of funding Bitcoin open-source development, and the donations will be made annually for the next ten years.
While BITB is the first spot bitcoin ETF launched by Bitwise, the crypto index fund manager is not new to professionally managed investment vehicles. Bitwise has previously launched 18 crypto investment products, including five other ETFs: three ETFs that invest in futures contracts and two that invest in crypto businesses. Despite Bitwise’s previous endeavors, Matt Hougan, Bitwise’s CEO, is calling the launch of BITB a “game-changer” and “turning point” due to the simplicity for mainstream investors to access Bitcoin. This mainstream access may downplay the speculative nature of these investments in misrepresentation and omission that a New York Crypto-Securities Lawyer, like the lawyers at Malecki Law, can assess for you.
However, due to its broad accessibility, it is important to emphasize that investing in BITB is not “risk free.” According to the BITB Prospectus, “Investing in the Trust involves risks similar to those involved with an investment directly in bitcoin and other significant risks.” Among those risks include the limited operating history of Bitcoin and its price being extremely volatile – its previous record price was set at $68,789 in November 2021, which had sunk to $16,605 just one year later at the beginning of 2023. As the value of shares of BITB is directly related to the price of Bitcoin, investors need to understand that the ETF is an inherently risky investment.
An investment with a large amount of risk, such as BITB, is not appropriate for every investor. Under SEC’s Regulation Best Interest, investments firms that sell these kinds of productions must make sure the investment is in their client’s “best interest.” This means the firm must examine their client’s investment profile and reasonably believe the type of investment product they are recommending is in their client’s best interest considering its potential risks, rewards, crypto-related products, there are always concerns about Reg BI violations.
With any crypto-related investment product such as BITB, it is important to understand the type of product and risk associated with the product before deciding to invest. If you have suffered losses from crypto-related products and think the recommendations of such products were not in your best interest, you need a Crypto-Securities law firm, like Malecki Law in New York, to review your investment portfolio and account opening documents.
Contributions by Samuel Krull, New York Law School Securities Arbitration Seminar and Field Placement Extern.